At times when the water comes rough, the first inclination is to find a port to get out of the storm. This is not one of those times. It would be wise for investors to sail forward.
Yes, the big indexes finished higher the week after setting high rankings along the way. Follow value stocks without running. But higher volatility – especially on the
Nasdaq Composite
– made things look a lot more blustery. The tech-heavy index moved up or down more than 2% three of the five days last week. On Wednesday, a relatively calm day, the Nasdaq had a 1.8% intraday swing.
The
Dow Jones business average,
for its part, rose five straight days, gaining nearly 1,300 points, or 4.1%, closing at 32,779. That’s the best weekly gain since November. The
S&P 500 index
intraweek range was close to 4%. He finished rising four out of five days and finished the week 2.6%, at 3,943. The Nasdaq broke a three-week losing streak, despite the volatility, riding a big 3.7% gain Tuesday to finish 3.1% for the week at 13,320.
Rising interest rates – and what they indicate about rising inflation – are the reason for the volatility. But higher rates are not a sign that investors should sell now. The market could rise much higher. But the market-leading stocks may be a little different than the ones that brought it to records in 2020.
Investors fear raising rates for two reasons. First, they make it harder to finance businesses. Higher interest costs mean that money owners, not stock owners, get a little more company money. Second, they reduce the value of future cash flows and shares, hitting growth stock particularly hard.
But rates are not even so high. 10-year Treasury yields have gone from around 1.2% to 1.6% over the last month. Levels were higher than that back in January 2020, before the pandemic. What really bothers investors is how fast they have risen.
At the end of the third quarter of 2020, 10-year Treasury yields were around 0.7%. On February 16 – the date the Nasdaq reached an all-time high – it was 1.3%, an increase of 60 points. (Base point is 1 / 100th of a percentage point.) The Nasdaq rose 21% over that range. Bond yields then went from 1.3% to 1.6% between February 16 and March 8, just after the Nasdaq entered a correction area. That’s a 30-point trend in less than a month. The Nasdaq sank, falling 10%.
“When rates go up, the market can take that,” says Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management. Barron’s. “The key issue is the rate hike – the rate at which rates move.”
Prices matter, but they can’t explain all versions of Nasdaq last week. U.S. inflation data, for example, was unusual Wednesday. Consumer prices rose at a slower rate than expected, and bond yields fell. However, the Nasdaq, which had jumped almost 2% early in the day, gave up all gains and closed lower.
Tesla
(ticker: TSLA), high growth stock, which had risen more than 6% that day, closed down 0.8%.
The reason? “Investors were concerned about becoming a fat growth stock,” Slimmon said. Growth stocks have gained stock value for years, but recently value has come back. The
Russell 1000 index value,
for example, up about 11% year to date. The
Russell 1000 growth index
down a bit.
Slimmon sees value stocks continue the trend. Analyst employment estimates for the coming year are rising faster among finance and business firms than tech names. Reviews like this are a useful way to see which areas are getting better, or worse, and to what extent. Positive earnings reviews usually mean good things for stocks down the road.
Brian Rauscher, head of global portfolio strategy and asset allocation at Fundstrat Global Advisors, will also look at earnings forecast revisions to help clients allocate investment dollars. It is still bullish. “Accelerating speculative and positive reviews [monetary and fiscal] policy will not mark the end of a bull market, even if people feel uncomfortable, ”he says.
Most of his clients are feeling uneasy right now, Rauscher says. Growth managers want to know if they should buy the recent discount. Value managers ask if they should ride later. For him, tech stocks aren’t dead, but value-based cyclical stocks like business companies, finance, product manufacturers, and travel companies look even more attractive.
Valuations across the market are a bit high, he admits. That’s another risk that concerns its clients. It is “elevated, not stretched,” as Rauscher points out the situation. “Is the market above fair value? Yes. Is it silly? No.”
Read more Dealer: Higher rates will not kill the stock market. What to do now.
He still doesn’t see silliness or euphoria: “This doesn’t feel like a market top.”
This is good news for investors affected by rising bond yields on the stock market. As long as things don’t go too far, too fast, we have a clear direction ahead. And sectors like businesses and banks seem to have the wind.
Write to Al Root at [email protected]